Research and development tax relief can help make working on innovative projects more affordable for your business. You may be able to claim tax relief even if a project is unsuccessful.
Extra research and development tax relief is only available for businesses which are UK limited companies. The relief can reduce your company's tax liabilities, or even provide a payable credit if the business is currently loss-making. Tax relief rates are particularly generous for smaller companies.
R&D tax relief eligibility criteria
Only some research and development qualifies for tax relief. The government's definition of research and development focuses on projects that:
- Aim to make an advance in science or technology. Using and configuring an existing, publicly available technology will not usually qualify.
- Need to overcome scientific or technological uncertainty. You cannot already know that the project is going to be a success (or be able to use experts who already know the solution).
- Aren't easy for an expert to work out.
A project does not have to be successful for you to claim tax relief.
Other commercial aspects of research and development are not eligible for extra tax relief. For example, you cannot claim for coming up with an idea, researching the market for a new product, protecting your intellectual property or developing relationships with new distributors.
Research and development examples
Research and development may involve working on a new or improved product or service. For example, if you are developing a technically innovative product, working on a prototype might well be eligible for tax relief. But scaling up to put the prototype into production is unlikely to qualify (unless that involves making another new scientific or technological advance).
It can also involve developing innovative processes that you use within your business. For example, developing a new stock control system might qualify as research and development (but simply configuring and implementing an existing software solution would not).
Although most research and development happens in sectors like manufacturing, pharmaceuticals and technology, other businesses can be eligible for tax relief. For example, architects and construction firms may be able to claim for developing new design techniques or working out how to use materials in innovative ways.
What tax relief is available?
Smaller companies (typically, those with fewer than 500 employees) usually claim research and development tax credits. This small or medium-sized (SME) tax relief allows you to offset 230% of qualifying costs against your taxable income (instead of the normal 100%).
For a profitable company, research and development tax credits can reduce your tax liability by around 25% of qualifying costs. A loss-making company may be able to claim a payable tax credit worth around 33%.
Your project may be partially or completely ineligible for these tax credits if you have also received a grant, if you are carrying out research and development as a subcontractor for a large company, or if your business is too large to qualify as an SME. If so, you may be able to claim less generous research and development expenditure credits (RDEC).
Separate tax breaks may be available for those research and development costs that do not qualify for tax credits or RDEC:
- Most capital expenditure on R&D facilities and equipment is eligible for a 100% first year research and development allowance (RDA). This works like the annual investment allowance (AIA) but is unlimited and includes buildings. The costs of acquiring land or intellectual property rights are not eligible for RDA.
- Profits made from patented inventions that you have developed may qualify for the Patent Box. Instead of the normal rate of corporation tax, these profits can be taxed at only 10%.
What costs qualify for tax relief?
Most of the costs of staff working on a research and development project are eligible for tax relief:
- The costs of employees who are directly involved in the research and development project. This includes salaries or wages, employers' National Insurance contributions and pension contributions, but not the cost of other employee benefits.
- If employees spent only part of their time on the project, only that part of their salaries (etc) qualifies.
- The same rule applies for supervisors and managers. The time they spend supervising and managing staff involved in the project qualifies.
- Costs for support staff qualify if they are directly supporting the project - for example, an engineer maintaining a machine used in the project. But broader support costs that would have been incurred anyway, like running payroll for the company, do not qualify.
If you use external agency staff to work on research and development, you can claim 65% of the payments you make (including agency fees as well as the costs of the staff).
If you subcontract out work, the costs you can claim depend on the relief you are claiming. For SME tax credits, you can usually claim 65%. For the RDEC scheme, subcontracting costs are usually not allowable unless you are subcontracting to individual subcontractors (as opposed to limited companies).
Some other R&D costs are also eligible for relief:
- materials, water , power and fuel used in the research and development - but not any materials used in products that are then sold
- software used in the project. If the software is also used elsewhere in the business, an appropriate proportion of the cost is eligible
- payments to volunteers for clinical trials
- some costs of funding independent R&D under the RDEC scheme
Claiming R&D tax relief
You can work out your eligibility for relief and what to claim yourself, or use an experienced adviser.
If you are doing it yourself, you will need to check the detailed government guidelines on the definition of research and development for tax purposes.
You will need to be able to explain exactly why a project qualifies. Your explanation should focus on the scientific or technological uncertainty, and what you did to address it.
Make sure that you keep good financial records, allowing you to work out exactly what costs are eligible for relief. You may need to back up your figures if HM Revenue & Customs has any questions about your claim.
You claim R&D tax relief when you submit (or amend) your corporation tax return. For accounting periods beginning on or after 1 April 2023, new claimants must give HMRC advance notice within six months of the end of the accounting period. From 1 August 2023, you must also provide additional information on the R&D and details of the costs with your claim. Your accountants may be able to include the claim as part of your normal tax return, but are unlikely to be able to provide detailed advice unless they have specialist expertise.